from the that's-one-step dept

Over the past few years, we've highlighted how frightened autodealers have absolutely freaked out about the way in which Tesla sells its cars. If you don't know, rather than having a bunch of independent dealers, Tesla sells direct, where you mainly buy via its website. Rather than dealerships, Tesla has showrooms where you can go check out the cars. The pricing is clear and obvious and it's much lower pressure. Dealers have tried a variety of tricks to actually outlaw Teslas from being sold in their states, even arguing that Tesla's website is illegal. Thankfully, most states aren't falling for this, and even the FTC has supported the Tesla way of selling cars.

Apparently, some dealers are finally realizing that if you can't beat 'em by trying to make them disappear, perhaps you ought to compete. Via Jalopnik, we learn of a dealer in Seattle (who owns both a Honda and a Toyota dealership) who has decided to adopt what he thinks is the "Tesla model" for selling cars -- single price, no haggling, no separate finance department whose there to screw you over on the deal terms, and transparency about the loan rates.

What's more, the dealerships have no F&I managers. Salespeople handle the loans. Learning to do that isn't easy, so Miller and Mohammadi have hired contractors to do some paperwork and walk the salespeople through the process.

Prices are fixed, and so are interest rates. Customers who need financing can refer to a chart on the wall, tracing their finger from their credit score to the amount of the loan.

Of course, the story also notes that this shift hasn't been easy. Most of the existing sales staff left as they couldn't deal with this setup, and sales at the dealership dropped significantly -- though they've since rebounded. And, of course, there have been other dealers in the past that have adopted "one price/no haggling" setups, but studies have shown that many customers don't trust such deals, assuming that the "one price" is likely to be higher than they could get by negotiating, even if they don't like haggling.

While I think it's a smart move to try to compete, rather than ban, innovative competitors like Tesla, it feels a little bit like a cargo cult copying situation, where the focus is on copying the obvious superficial aspects of what Tesla is doing, but not the deeper hidden reasons. In Tesla's case, it's a combination of factors that are selling those cars, including the cool factor, the environmental factor and the overall prestige of the car. Hondas and Toyotas, while recognized as reliable, don't have all of those factors. Plus, since the Tesla sales model is for all Teslas, there is no other option, so no one feels that the single price offering is a rip off. That's not the case when a single dealer does something.

So I think it's good that this dealer is looking for a better model, but it's going to involve a lot of experiments and innovating, beyond just copying some of the superficial aspects of what Tesla does.

from the the-most-logical-explanation dept

A year ago, NPR's Planet Money podcast had a show detailing one of the most horrific consumer experiences around: buying a car. The main reason it was deemed that the process was so ridiculous and unpleasant was a variety of state laws that ban car makers from selling directly, and instead require a network of dealerships. A research paper highlighted how these state laws have been a massive boon to the owners of dealerships, but have seriously harmed automakers themselves. It has also shown how these laws are open to significant corruption issues, since dealers generate tremendous local tax revenue:

States earn about 20 percent of all state sales taxes from auto dealers, and auto dealerships can easily account for 7-8 percent of all retail employment.... The bulk of these taxes (89 percent) are generated by new car dealerships, those with whom manufacturers deal directly. As a result, car dealerships, and especially local or state car dealership associations, have been able to exert influence over local legislatures. This has resulted in a set of state laws that almost guarantee dealership profitability and survival--albeit at the expense of manufacturer profits. Given these laws, manufacturers do have a financial interest in closing down new car dealerships, and in choosing which ones wil close. Additionally, available evidence and theory suggests that as a result of these laws, distribution costs and retail prices are higher than they otherwise would be; and this is particularly true for Detroit's Big Three car manufacturers--which is likely another factor contributing to their losses in market share vis-a-vis other manufacturers.

There is basically no valid reason for such laws. They serve no purpose other than to enrich local car dealership owners and state tax coffers at the expense of everyone else -- especially the public.

And yet, because these laws benefit both the politicians in charge and local dealerships, which tend to have strong lobbying power, they stay in place. That fight has been getting more notice lately, in large part because of Tesla, the innovative electric car company that has wowed nearly everyone who's driven one. A few years ago, we wrote about dealerships starting to complain about Tesla and it's plan to sell direct via the web, but with company-owned "showrooms." Tesla reasonably argued that these are not dealerships, and such laws didn't apply. Car dealers have flexed their political muscle to get various states to basically make it illegal to buy Teslas. This has even reached insane levels, with dealerships claiming that Tesla's website violates California DMV rules.

This is insane on any number of levels. Not only is the car better for the environment, reviewers write about the car and talk about how it may be the best car ever built.

In response to this, entrepreneur/investor Paul Graham put it succinctly that banning Tesla "is an index of the corruptness of state governments" in the same manner as cities banning Uber or other disruptive new services. As in nearly all of those cases, the dealers are (laughingly) trying to argue that this is a "consumer protection issue." Again, the research linked above notes there's basically nothing to that argument, and safety reviews of the Tesla have suggested the car is incredibly safe. Besides, what does the safety of a car have to do with dealerships? Dealers try to claim that local dealers are "more committed to taking care of that area's customers." And yet they provide no evidence to support that -- mainly because there is none.

What's particularly hilarious, is that this move comes just days after New Jersey Governor Chris Christie talked up the power of the free market and against government intervention in business:

“We need to talk about the fact that we are for a free-market society that allows your effort and ingenuity to determine your success, not the cold, hard hand of the government.”

Right up and until the biggest supporters of state taxes demand your own government kills off sales of an innovative new competitor. Then, the "cold, hard hand of government" smacks you down.

The facts here are pretty simple: Tesla has built an innovative car, and gone with a pretty standard way of selling almost every non-automobile product: sell direct to a public who wants it. Dealers and state politicians, on the other hand, are basically teaming up in a corrupt manner to harm everyone (especially the car buying public) but themselves, and then having the gall to claim that they're doing so for the sake of "consumer protection"? No one's buying that excuse. Beyond the research above, plenty of others have pointed out the absurdity of this argument. Last year, professor Dan Crane debunked that basic claim:

A second argument is that having local dealers is necessary to ensure that customers are adequately served. For example, Bob Glaser of the North Carolina Automobile Dealer’s Association has asserted that the restrictions are a form of “consumer protection,” since “a dealer who has invested a significant amount of capital in a community is more committed to taking care of that area’s customers.” The obvious rejoinder is that Tesla has as much or more of an interest as the dealers in seeing that customers get the level of service they’re willing to pay for. If Tesla gets a bad reputation for quality, it will fail. I suppose that one might worry if Tesla were a fly-by-night operation selling customers an expensive durable good at a high price and then fleeing with its profits and leaving customers without support. But that’s obviously unlikely of a company that’s pouring billions of dollars into the creation of a new product and a recharging and battery swapping infrastructure. Car manufacturers make considerably larger fixed capital investments than do dealers and I’m sure that the dealer failure and exit rate is considerably higher than that of manufacturers.

A related argument is that dealers play an important role in complying with local laws regarding titling and safety inspection. But this argument doesn’t work either. First, observe that at present most states only prohibit manufacturers from opening their own dealerships—they don’t prohibit online sales from outside the state. (North Carolina recently passed a statute banning online sales as well). There’s no reason why a manufacturer-owned dealership should be less capable of complying with local laws than an independent dealer. Second, why should Internet sales involve evasion of state titling and safety inspection laws? Internet sales can just as easily be subject to the same titling and inspection requirements as dealer-initiated sales.

Furthermore, if it were true that consumers were harmed by letting companies sell directly, you'd think consumer advocates would be supporting the dealers. But they're not. They're supporting Tesla:

Jack Gillis, with the Consumer Federation of America, disagrees. Customers actually don't like haggling over prices, as evidenced by the fact that we haggle over almost nothing else except cars. A one-price system, like Tesla's, is fairer, Gillis said, because it's more transparent and doesn't put less belligerent shoppers at a disadvantage. If the price is too high, customers just won't buy the product.

In the end, New Jersey's actions just confirm what lots of people already knew, that New Jersey is hopelessly corrupt. But, this is nothing new. As Dan O'Connor points out in his story about all of this, a century ago, people did the same thing against the automobile, and in favor of horses. The (I'm not joking) Horse Association of America was created more or less to fight back against those evil cars, and presented talking points like the following:

If the extended displacement of horses and mules by motors resulted in economic gain to the nation as a whole, the campaign of the Horse Association of America to increase the production and use of horses and mules would not be warranted. The Association states that ample evidence has already been secured to prove that in many instances, such displacement is economically unsound, resulting in less reliable, less efficient service at greater cost. Consumers, grain dealers and grain producers alike suffer from such substitution, which, according to a leading traffic manager in New York City, is due chiefly to ignorance on the part of business men regarding the actual cost of operating horse drawn and motorized equipment.

That sounds mighty familiar. A century ago, politicians mostly saw through the insanity of it. But there wasn't so much money at stake back then. Today is different, and we all suffer because of it.

from the (no)-sympathy-for-the-devil dept

Auto dealers have been dealing with disruption just about as well as any other legacy industry has. Instead of attempting to compete, dealers have chosen to respond to Tesla's refusal to cut them in on the middleman action by throwing up as many regulatory roadblocks as possible. Sadly, this antagonistic attitude toward both their competition and the car-buying public somehow makes sense to them, and they seem very willing to bury both the upstart and their last remaining shreds of goodwill at the same time.

In many states, the usual course of action for car dealers is to lobby for protective legislation. Many states have already hooked up car dealers and made it illegal for manufacturers to sell vehicles directly to the public. The remaining states that haven't are being pressured to follow suit.

The association's letter to the California DMV (PDF) complains Tesla violates several sections of various Federal and California codes and regulations:

"Tesla fails to provide required information and shatters the notion of comparison finance shopping by including the potential availability of incentives, gas savings, and tax savings into final payment quotes for prospective customers. This scheme is most blatantly demonstrated by the general ―$580 per month after gas savings advertisement found on several of its internal web pages."

It also notes that Tesla's quoted new-car prices net out a $7,500 Federal income-tax credit for purchase of a plug-in electric car. According to the California dealers, just 20 percent of all car shoppers qualify for that credit--and the group attributes that statistic to the Congressional Budget Office.

The complaint also attacked the way Tesla calculates resale value of its cars, the financial value of savings in commute time by using HOV lanes, and the methods used to calculate the savings of powering a car with electricity versus gasoline.

The letter (which runs nine pages alone and includes 11 pages of exhibits) also takes issue with Tesla's widely criticized "cost calculator" and its usage of "net pricing" to show potential buyers a pretty much unattainable ticket price. The letter includes screenshots of Tesla's website, some of which include tons of fine print that would seem to indicate that the rosy picture being painted above, which utilizes all possible incentives and rebates, actually comes with several catches.

But while the letter goes long on "deceptive pricing" and "arbitrary numbers," it conveniently ignores the fact that auto dealers have long held a monopoly on those tactics as well. The reputation of car salesmen ranks somewhere between lawyers NSA officials and Ponzi scheme operators. For most people, buying a car is a process is roughly on par with going in for a full body wax -- you're just hoping to escape with as little pain and bleeding as possible. (Escaping with any dignity intact is out of the question...)

This seems to be a whole lot of effort to be expending in order to grab a percentage of a higher-end niche market. The auto dealers would be better off approaching their "benefactors" (especially the Big Three) and asking them why they're not producing highly desirable, groundbreaking products at bonus-spiking profit margins. Instead, they'd rather approach the situation in the worst way possible -- attacking an upstart with a righteous fury that's completely oblivious to the obvious hypocrisy of the accusations.

Certainly Tesla should conform with applicable laws, but its website -- which to most people will still look like amazing prices attached to pages of fine print -- is pretty much similar to any car dealer's online cost calculator. People who think they're going to get the low monthly payment (and low percentage rate) splashed across TVs and newspapers (and websites) are rarely surprised to find out they don't qualify for the promotional rates. What the auto dealers are pointing to as the epitome of deception in this letter is really nothing more than "another day at the office" at nearly every sales operation anywhere: if something looks too good to be true, it probably is. And most consumers are able to see through these advertising tactics without the help of protectionist laws, just as surely as they'll recognize the auto dealers' "concern" for what it truly is: self-interested and desperate flailing.

from the stupid-regulations dept

Another day, another story of stupid protectionist regulations getting in the way of anyone trying to be innovative. This time, it's about Tesla, the well known electric car company based out here in California. Apparently, various states have set up ridiculous protectionist laws that say it's illegal for automakers to sell cars directly to consumers in retail settings. The various car dealer lobbyists who pushed to get those laws passed are now complaining that Tesla and its high end "stores" violate that law -- despite the fact that you can't actually buy a Tesla car in a Tesla store. In order to stay on the correct side of these idiotic laws, you can go into the stores and learn all about the Tesla... but if you want to buy, you have to go online and put money down via Tesla's website. The dealers are arguing that "anything that gets you to the executed contract is part of the sale," but that's ridiculous. A magazine ad. A TV commercial. Plenty of other things can "get you to the executed contract" and are perfectly reasonable.

What's really going on here is that states have passed these protectionist laws to help out independent dealerships who worried that car companies might decide to cut out one of the more annoying middlemen in the world and go direct to consumers. So they passed these laws which serve no purpose, whatsoever, other than to encourage greater annoyance and overhead for car buyers. Just the fact that you can't actually buy a Tesla at a store should highlight how silly this -- but the fact that these dealers are still complaining and arguing that the company violates the law shows just how petty they can be.